What mortgage holders should do with their tax refunds: Mark Bouris

Over the next few weeks a lot of readers will be receiving tax refund cheques. According to the ATO, the average refund issued between 1 July 2012 and 20 August 2012 was $2,217 – not a small amount.

What should you do with it?

First job/tertiary student: If your credit card balance is getting close to the max, a tax refund should be applied to it. If your credit card is looking OK, you should make this money earn more money, without locking it away for the six months or a year of most bank term deposits. There are high-interest savings accounts that allow you to take out the money when you want, but check the fine print: many of these high-interest rates drop once your money has been in there for four to six months.

House savers: If you are saving a deposit for a house, a tax refund is best placed in your high-interest savings account, so long as you don’t have significant credit card debt or a high-interest car loan. For example, if you are paying 15% for your cards, and only getting 5% in your savings, perhaps use the tax refund to control your debt.

Mortgage payers: In most variable-rate mortgage accounts, once you’ve been paying it for 18 months or more, you are starting to pay down principal. Paying lump sums into the mortgage at this stage can noticeably accelerate the pay-out. Be warned: there’s no point doing this in most fixed-rate mortgages, and many variable-rate home loans won’t allow you to put in lump sums. So check your mortgage first.

Mortgage payers with kids: People with mortgage and kids have so many competing priorities for a windfall that there could be 20 places to put a tax refund cheque. My advice is to not absorb it into the general bank account: tag the money and make it work for you. And if you’re stressed and overworked, consider putting that tax refund into a holiday.

Business owner: Business owners can reinvest a tax refund straight back into the business or use it to pay down personal debt, depending on where the refund accrues. Either way, a tax refund shouldn’t be squandered.

Pre-retirees: People in their 50s are still working and paying mortgages, but also preparing for retirement. Look at topping up your superannuation, having first checked with an adviser about the benefits and latest rules. A tax cheque could also be placed into a high interest bearing account, or could buy high-yielding shares (that deliver dividends). A tax refund cheque into the mortgage is a good bet.

Retiree: In retirement investors looking for very stable, high-yield places to put their money. If you’re lucky enough to have a tax refund look at a high-interest account. There’s no point in banking this cheque in your bank transaction account – you’ll be receiving either a zero interest, or an interest rate so low that the monthly account fees wipe it out.